Dollar Down After Fed Cuts Rates And Signals Pause

The Federal Reserve, in a widely expected move, cut the Fed funds rate by a quarter percentage point to 2% on Wednesday. It also lowered the discount rate by the same amount to 2.25%. From its accompanying statement, one could sense that they are hinting that this cut could be the last one for now, after having cut more than 300 basis points from 5.25% since September last year. This is what the Fed said: “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity.” Words and phrases like “substantial” and “should help to promote” are indications the FOMC is likely to take a break from all the chopping, and sit back to monitor the effects of this monetary stimulus. What is also worth noting is that two Fed officials did not want rates to be cut at all, preferring the rate to stay unchanged. Those two dissenters are Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, both of whom also objected to last month’s cut. Of course, Fed being the Fed, it reassured financial markets that it is going to keep a close eye on the financial-economic situation, saying that “the committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.” The Fed also added that “financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.” Maybe the worst hasn’t come yet.

As this expectation has somewhat been priced into the market, the US dollar slipped slightly after this rate announcement. EUR/USD rose around 100 pips from 1.5540 to 1.5640 in the half hour after the announcement. USD/JPY fell around 110 pips post-rate cut, from 104.80 to 103.70.

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